Nomura Asset Management Co. has been snapping up UK government bonds as their yields look more attractive compared with other European countries."Within Europe, UK debt is the most compelling option to invest," Yuji Maeda, head of global fixed income investment at the $646 billion firm, said in an interview in Tokyo, adding that the Bank of England has been "taking its time" to cut interest rates. "Given that gilts still offer a yield over German Bunds, the UK looks easier to invest when compared with a country like France."

Despite a tumble in gilt yields this month, the 10-year maturity is yielding about 4.4%, making it appealing for investors in Japan, where domestic bonds of the same maturity are offering around 1.6%. Nomura is not the only Japanese asset manager positive on the bonds, with Amova Asset Management also holding a slight overweight.Maeda has been adding to Nomura's gilt position this year, opting for 10-year maturities. He said "the worst is over for the UK" as inflation is heading lower and fiscal conditions are set to improve.

"The market turmoil we saw during the period of former Prime Minister Liz Truss is likely to have incentivized the government to be more fiscally prudent," he said, adding that tax increases expected at the November budget are a positive sign for investors.

The prospect of spending cuts and tax hikes to be announced next month and data last week showing UK inflation is easing are likely to raise the possibility of rate cuts, with economists at Goldman Sachs Group Inc. predicting the BOE will lower borrowing costs as early as next week. Swaps traders now favor at least two more quarter-point reductions by the end of next year.While Maeda sees gilts as attractive over the next six to 12 months, he is also aware of long-term risks facing the country's economy, with the ongoing budget challenges and the lingering impact of Brexit.

"Over the longer term, I have doubts about UK stability, given inflation risks tied to immigration, and ongoing questions around fiscal discipline," he said. "But for the near term, we like these levels."

Source: Bloomberg Europe

Higher 10Y euro swap rates through steeper curves

With hard data confirming eurozone growth is on a recovery trajectory, we think 10-year euro swap rates should start considering a push higher. Additionally, inflation came in hotter, bringing the 10-year inflation swap a tick closer to the 2% target again. We acknowledge that the upside potential for euro rates remains limited this year, and we target a 10-year rate of some 10 basis points above the current 2.65%. With growth on track to improve further in 2026, that's when we aim for the 10Y to look at 3% as the new equilibrium.

For the front end, the wiggle room is much more limited as the ECB's mantra of being "in a good place" is set on repeat. That means that the 2Y swap rate is firmly anchored between 2.1% and 2.2%. The rise in longer-dated yields must therefore come from steeper curves. That steepening faces resistance from the US, however, where 10Y UST yields dove from 4.5% to 4.0% over the past months. As 10-year US rates stabilise, or even rise as we predict, the 2s10s of the euro curve should feel more comfortable steepening.

Dutch pension reforms too complex to push for steeper 10s30s by itself

Besides US spillovers, we have flattening pressures from the very long-end to deal with, whereby the 10s30s steepener seems to have come to a halt. The 10s30s dynamics this year have been almost entirely dictated by the US, but Dutch pension reforms may also play a role. Whilst we still anticipate significant unwinds of 30Y becomes and bonds starting in January, we feel the trade may have become too crowded over the summer.

Estimating the timing and size of the flows stemming from the pension reforms is extremely complex, if not impossible, given the available data. Each fund of the 30 scheduled to transition on 1 January 2026 has a unique maturity profile and hedging strategy. Additionally, we remain concerned that IT problems could result in last-minute delays. And now that the US macro landscape is less supportive of 10s30s steepeners, we understand that the trade has become less attractive from a risk-reward perspective.

US Treasuries continue to trade heavily post-FOMC

As the dust settles following Wednesday's Federal Open Market Committee outcome, the new levels for the 2-year and 10-year combo are 3.6% and 4.1%, respectively (both up 10 basis points). The net feeling centres on a Fed Chair that has no problem leaving the funds rate unchanged at the December meeting, if that is deemed the thing to do. It comes with residual comfort in the economy. The fact that a 4.3% unemployment rate was specifically referenced as "low" amplifies this point. Instead, there is a degree of discomfort with inflation running at 3%, and likely heading higher.

At the same time, there has not been a material change in the ultimate landing level for the funds rate. It's now slightly above 3%, but still within the 3% range. And the 5yr rate continues to trade below the straight line that can be drawn between the 2yr and 10yr rates in a steady fashion. This signals an unwavering expectation that the Fed is, in fact, far from done — it's just a matter of timing. The question now is how robust (or not) the economy manages to be in the next month or so. Yields may continue to push higher—particularly for longer maturities—despite the current pause. However, the lack of hard data remains a challenge due to the ongoing government shutdown. It is an opportunity for the 10yr yield to have a go at testing higher. It might not go too far, but there is a data vacuum that can be filled in, at least until we gain more clarity.

Friday's events and market views

We start with eurozone inflation numbers. The headline French CPI number is expected to come in at just 0.9% year-on-year, a tick below the 1.1% from September. Italian inflation is also expected to nudge lower, from 1.8% YoY to 1.6%. This would then help the eurozone aggregate core CPI down from 2.4% YoY to 2.3%. Due to the US government shutdown, we only expect the Market News International (MNI) Chicago PMI to stand out as notable data.

Source: ING

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Source: Bloomberg

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Source: Bloomberg

China's and Canada's leaders met on Friday for the first formal sitdown in eight years as the two nations look to reset ties strained over trade and security issues.

President Xi Jinping met with Canada's Prime Minister Mark Carney on the sidelines of the Asia Pacific Economic Community meeting in Gyeongju, South Korea. Carney said he welcomed an invitation for him to visit China extended by Xi.

Xi said at the start of their meeting, "In recent times, after mutual efforts, China-Canada ties have shown a recovery and improvement trend. This aligns with both countries' mutual interest."

"Our countries have a long history of engagement," Carney said, noting the recent 55th anniversary of the establishment of diplomatic ties with Communist-ruled China. "In recent years we have not been as engaged," he said, in oblique reference to the tensions between the two Pacific nations.

"Distance is not the way to solve problems, not the way to serve our people with people-centered growth," the prime minister said. "Pragmatic and constructive engagement is."

Xi, for his part, said that "China is willing to work with Canada to push China-Canada ties to return to the correct track of being healthy, stable and sustainable as soon as possible."

Canada's relationship with China plummeted when China detained two Canadians, Michael Kovrig and Michael Spavor, in apparent retaliation for Canada's arrest of Huawei executive Meng Wanzhou on a US extradition warrant.

The two men were released in 2021, but ties didn't dramatically improve — with allegations swirling in Canada that China had interfered in previous elections and Beijing continuing to block imports of Canadian beef and pet food, among other goods.

Former leader Justin Trudeau spoke briefly to Xi in late 2023, with that exchange the first time they had spoken since Xi chastised Trudeau in public for allegedly leaking details of a prior meeting.

China hiked tariffs on Canadian canola in August in the latest round of their ongoing trade war, but since then the pace of bilateral contact has picked up, with Carney meeting Chinese Premier Li Qiang last month in New York and Foreign Minister Anita Anand traveling to Beijing earlier this month to meet her Chinese counterpart, Wang Yi.

Earlier this week, Carney downplayed expectations for immediate tariff relief, saying the meeting would be "the start of a broader discussion."

He said there were some areas where the two sides could make quick progress, such as easing travel restrictions on each other's citizens. But the goal will also be to set conditions for longer-term progress on trickier matters, he added.

"We're starting from a very low base and we can move quite substantially before we start to get to sensitive areas," Carney told reporters on Monday.

Canada currently has steep tariffs on Chinese electric vehicles, steel and aluminum products, which were imposed in 2024 in an effort to match US policies.

Carney is seeking to balance his security interests, which overlap with Washington, against his country's economic wellbeing, which is being tested by Trump's aggressive trade war. His Asia tour is part of his recently announced goal to double Canada's exports to markets outside the US within a decade to net an extra C$300 billion ($215 billion) in trade.

Source: Bloomberg Europe